Mosler's Law: There is no financial crisis so deep that a sufficiently large tax cut or increase in public spending cannot deal with it

Full Employment AND Price Stability

“… one wants to explain the empirical fact that involuntary unemployment is only associated with money-using contractual economies. In other words, real economies that do not use money and money labor contracts to organize production (e.g., feudalism, slave economies, South Sea Islanders discovered by Margaret Meed, etc) may possess important nonlinearities and even an uncertain future — but there is never an important involuntary unemployment problem. Slaves are always fully employed as well as are serfs in feudalism…….Finally it should be noted that herds of animals, schools of fish, etc organize together to solve the economic problems of What? How? For Whom? Without using money, contracts or markets, these animals still face complex nonlinear problems in their search for food and interaction with other herds. Yet animals never suffer from involuntary unemployment!.

Professor Paul DavidsonUniversity of Tennessee

(PKT Archives)

Introduction

The current monetary system can sustain both full employment and price stability over the short and long run. It will be shown that:

1) Unemployment equates to the Federal budget deficit being too small, and

2) The value of a currency is determined by the prices paid by that government.

The government has embraced two primary economic objectives: price stability and full employment. Ironically, it has chosen a monetary and fiscal policy that utilizes excess capacity, including unemployment, to maintain price stability, obviating the possibility of simultaneous achievement of both objectives. The focus of this analysis is on an entirely different option in which the government assumes the role of employer of last resort (ELR), eliminating involuntary unemployment, and price stability is maintained by the government restraining the price it pays for the proposed supplementary ELR labor pool.

The Employer of Last Resort (ELR) Alternative

The U.S. Government can proceed directly to zero unemployment by offering a public service job to anyone who wants one as a supplement to the current budget. Furthermore, by fixing the wage paid under this ELR program at a level that does not disrupt existing labor markets, i.e., a wage level close to the existing minimum wage, substantive price stability can be expected.

The ELR program allows for the elimination of many existing government welfare payments for anyone not specifically targeted for exemption, as desired by the electorate. Minimum wage legislation would no longer be needed. Labor would welcome the safety net of a guaranteed job, and business would recognize the benefit of a pool of available labor it could draw from at some spread to the government wage paid to ELR employees. Additionally, the guaranteed public service job would be a counter- cyclical influence, automatically increasing government employment and spending as jobs were lost in the private sector, and decreasing government jobs and spending as the private sector expanded.

This ELR proposal at one level resembles workfare, which has been rejected by Congress, though some state welfare reform programs are not unlike workfare. However, unlike this ELR proposal, the state programs may be serving to create a new class of sub-minimum wage employees who are replacing regular public employees.

The ELR proposal also has characteristics similar to the current Federal unemployment compensation policy. There are, however, significant differences as unemployment is 1) compensation is payment for not working, 2) temporary, 3) does not cover everyone, and, 4) is less than the proposed ELR wage.

In addition to zero unemployment, it will be shown that this ELR policy establishes price stability not entirely unlike many proposed income policies have been designed to do. However, an ELR program would, nonetheless, face stiff opposition as it allows the federal budget deficit to float, with a high probability of permanent and growing deficits. For example, using rough estimates, if the government employed 8 million new public servants at, say, $12,500 per year, that would be a new expense of $100 billion. Subtract from this some portion of approximately $50 billion currently spent on unemployment compensation, $15 billion spent on AFDC, and over $20 billion spent on food stamps that may be reduced, and the net may be an additional $50 billion of annual deficit spending. Therefore, this study will first focus on why the fear of deficits per se is unwarranted.

Taxing, Spending, and Borrowing with a Non-Convertible Currency

The U.S. dollar is not legally convertible into anything by the government on demand. It is, however, designated by the government as the only means of discharging federal tax liabilities. Tax liabilities are an ongoing debt the private sector owes the government, and they create a continuous need for dollars. The private sector obtains the needed dollars primarily as payment for the transfer of real goods and services to the government, and it is government spending or lending that provides the dollars needed to pay taxes. For purposes of this analysis, government spending includes spending by the government or any of its agents. For example, when the central bank buys foreign currency, it is the same, for cash flow analysis, as the treasury buying military equipment. This is commonly referred to as viewing the treasury and central bank on a consolidated basis.

The imperative of taxation is to create sellers of real goods and services willing to exchange them for the unit of account selected by the government. Dollar denominated tax liabilities function to create sellers of real goods and services who must have dollars to extinguish their tax liabilities. Raising revenue, per se, is of no consequence to the government, as dollars are not a limited government resource, but a liability, or tax credit, that can be issued at will. The government’s ability to raise revenue does not limit what it is able to purchase. The purchasing power of the government is limited only by what is offered for sale in exchange for dollars.

“A prince, who should enact that a certain proportion of his taxes should be paid in a paper money of a certain kind, might thereby give a certain value to this paper money; even though the term of its final discharge and redemption should depend altogether upon the will of the prince.”

Cannan’s summary of this paragraph reads:

“A requirement that certain taxes should be paid in particular paper money might give that paper a certain value even if it was irredeemable.”

This was also well understood by British colonial governors:

“In those parts of Africa where land was still in African hands, colonial governments forced Africans to produce cash-crops no matter how low the prices were. The favorite technique was taxation. Money taxes were introduced on numerous items: cattle, land, houses, and the people themselves. Money to pay taxes was got by growing cash crops or working on European farms or in their mines.” (Rodney, 1972, page 165, original emphasis)

In his Treatise on Money, volume 1, page 4, John Maynard Keynes wrote “…and in addition the State claims the right what thing corresponds to that which discharges obligations.”

There is little evidence that this once common understanding of non-convertible money has survived the era of convertible commodity money.

Treasury Securities and Interest Rate Maintenance

In the commercial banking system loans create deposits as an accounting entry. Commercial bank reserve accounts at the Fed can be thought of as non-interest bearing checking accounts at the Fed, and reserve requirements can be thought of as minimum balance requirements. Reserve balances are assets of the member bank, and bank liabilities are assets of the Fed.

The consolidated ledger for the entire banking system is always in balance, with the exception of a few operating factors, such as checks in the process of clearing. When any bank transfers money to another bank, the first bank’s deposits are reduced and the second bank’s deposits are increased. Total deposits in the commercial banking system remain unchanged:

Bank A and Bank B are in balance. They have each originated 100 in loans and credited the proceeds to the borrower’s checking account.

Bank A has lost its deposit to Bank B. The banking system in aggregate is still in balance, though Bank A’s reserve account at the Fed is overdrawn by 100 and Bank B’s reserve account has a positive balance of 100. In this case, Bank A can borrow from Bank B. It is possible to restore balance without intervention by the Fed.

If, however, commercial bank A’s depositor writes a check to the U.S. Treasury payment of taxes, the Fed debits the reserve account of Bank A and credits the Treasury’s account at the Fed. Total bank deposits in the commercial banking system are reduced while total loans remain unchanged:

Bank A and Bank B are in balance. They have each originated 100 in loans and credited the proceeds to the borrower’s checking account.

Bank A’s depositor has made a payment to the Treasury’s account at the Federal Reserve. The Fed debits the reserve account of Bank A, and credits the Treasury’s account at the Fed. The banking system now has an overdraft at the Fed, known as a reserve deficiency, of 100. In this case, Bank A’s reserve account is overdrawn. If Bank A borrows from Bank B, the deficiency moves to Bank B and Bank B’s reserve account is overdrawn. If either bank originates a new loan and creates a new deposit, assets and liabilities will increase equally, leaving the size of the deficiency unchanged. Nor will repayment of existing loans modify the deficiency.

For all practical purposes, a system wide deficiency in the commercial banking system can only be alleviated by a transfer of funds from the Fed to the reserve account of a member commercial bank. When the Fed credits a member bank’s reserve account and debits its own account, total reserves in the commercial banking system are increased. In this simple case, if the Federal Reserve loans 100 back to Bank A, the banking system regains balance. Beginning with the deficiency condition:

The Fed replaces an overdraft with a loan:

Even if Bank A did not cover the deficiency, the Fed will book the overdraft as a loan and charge an appropriate penalty. In that way, a deficiency is always covered by a loan from the Fed. The variable is the rate, and possibly the collateral demanded by the Fed to secure the mandatory loan.

Should government spending exceed tax receipts, there is a budget deficit as defined for accounting purposes. Government spending is generally done via a credit to a commercial bank’s reserve account at the Fed, and an offsetting debit of the Treasury’s account at the Fed. The credit to the member bank’s reserve account is all that affects the private sector, as any offsetting transactions between the Fed and the Treasury’s account at the Fed are entirely outside the commercial banking system, and are offsetting entries on the government’s consolidated balance sheet of the Treasury and the Fed.

Let us assume the commercial banking system is in balance with all banks satisfied with their current reserve balances as in figure 4:

A 100 payment from the Treasury to Bank B’s customer is facilitated by the Fed debiting the Treasury’s Fed account and crediting Bank B’s reserve account:

Assuming for simplicity there are no reserve requirements, this creates an imbalance in the commercial banking system known as a system wide reserve excess. Since reserve accounts are not interest bearing, a bank with a reserve excess will attempt to loan those funds to another bank. With no other banks in deficit at the Fed, the overnight rate, known as the fed funds rate, would fall to 0 bid. Banks would be unwilling to pay interest to attract overnight deposits that don’t earn interest.

Excess reserves do have value if they can be utilized to repay loans from the Fed, to purchase new Treasury securities from the Treasury, or to purchasing existing Treasury securities from the Fed’s current portfolio. All of these constitute the transfer of funds to the Fed. Only a transfer of funds from the commercial banking system to the Fed can diminish a reserve excess.

Purchases and sales of securities by the Fed are called open market operations. The normal operating procedure is for the Fed to offset factors that cause reserve imbalances, called operating factors, with open market operations. Operating factors include any transfers between commercial banks and the Fed, and other items that effect reserve balance including changes in uncleared checks, known as “float”, and changes in cash in circulation.

The sale of newly issued government securities by Treasury affects the private sector in exactly the same way as the sale of securities by the Fed from its portfolio of existing government securities. In either case, funds held by the private sector are transferred to the Fed, the government securities are credited to a member bank’s account, and a reserve drain equal to the proceeds of the securities sale results.

Beginning with a reserve excess of 100:

The Fed sells 100 Treasury securities to Bank B:

Now, Bank B is willing to pay interest to keep its deposits as it has 100 of interest bearing loans and 100 of interest bearing Treasury securities to fund.

A system wide reserve excess or shortage can only be offset by transfers of funds to and from the Fed. If the government wishes to maintain an interest rate between “0 bid”, the condition coincident with a reserve excess, and “no offers”, the result of a reserve deficiency, it must offset operating factors that cause these conditions. Some form of interest bearing deposits, such as Treasury securities, must be offered in the case of a reserve excess. Funds are loaned, either directly (including overdrafts) or via open market purchases of securities, in the case of a reserve deficiency.

The Fed requires member banks to maintain minimum reserve balances known as required reserves. These do not pay interest, and therefore reserve requirements constitute a bank tax equal to the rate of interest banks must pay the Fed to borrow the required reserves, or, from another point of view, the interest foregone by leaving money in non-interest bearing reserve accounts. Currently the Fed enforces certain minimum reserve requirements. A reserve excess or deficiency is defined as the banks having either an excess of reserves above the required level or a reserve total that is below the required level.

Technically, the concept of the Fed being the only source of net reserves follows directly from a lag reserve accounting system wherein reserve requirements are based on deposits from a previous time period. Since reserve requirements are determined by a deposit count from a previous time period, and reserve accounts do not pay interest, demand for reserves is inelastic. Increasing or decreasing loans, and thereby deposits, for example, does change future reserve requirements, but cannot alleviate a current imbalance.

Even with a lead system, as the U.S. had in the 1960’s, practical considerations of short term inelasticities of bank loan portfolios result in the same Fed policy of acting only defensively in the money markets (Basil Moore, Horizontalists and Verticalists, 1988). In other words, the Fed can only react to imbalances by offsetting them. The Fed does not have the option to act proactively to add or drain reserves to directly alter the monetary base unless it is prepared to accept either a 0 bid interest rate, or an interest rate coincident with a reserve deficiency at one or more member banks. However, as a reserve deficiency is automatically booked as a loan, the Fed’s only real option is to set the price its loan of needed reserves to the commercial banking system. This is the basis of the concept of endogenous money, the major theme of Post Keynesian monetary thought. (Pkmt survey, Cottrell, pkt archives)

Treasury securities, therefore, function not to fund expenditures, but to provide an interest bearing deposit for non-interest bearing excess reserve deposits. The sale of Treasury securities supports the overnight interest rate determined exogenously by the Fed. Deficit spending without security sales from the Treasury or the Fed would create a reserve excess and result in a “0 bid” for overnight deposits. The economic difference between the government issuing securities and not issuing securities is the economic difference between a ‘0 bid” short term interest rate and some positive short-term rate of interest. Consequently, the offering of government debt to the private sector coincident with deficit spending is a necessary condition for the government to maintain a positive overnight interest rate.

The same logic applies to the physical printing of money. If currency is printed and spent by the government in excess of the private sector’s desire to hold cash, the holders of this excess cash will be unable to find any interest paying depositories for their cash if the government does not sell securities or offer other interest bearing deposits. A “0 bid” short-term interest rate would prevail.

Without the understanding that the dollars used to purchase government securities would otherwise reside overnight in non-interest bearing reserve accounts, fears such as ‘roll over risk’ (problems relating to possibility of the government issuing new bonds to replace maturing bonds, and not finding any borrowers) and financial ‘crowding out’ (the notion that sales of government bonds use up money that would have been available for other borrowers) can surface and block fiscal policy options that include increased deficit spending.

Exogenous Pricing: A Basic Case of Monopoly

The current monetary system is a classic monopoly with the traditional analysis of monopoly sufficient to describe all aspects. The government is the monopoly issuer of the dollars needed by the private sector to pay taxes. Spending by the Treasury and spending by the Fed when it performs offsetting open market operations, as well as direct lending by the Fed supply the private sector with the needed dollars. In all cases, the private sector exchanges assets, goods, or services to the govt., the monopoly supplier, in exchange for dollars ultimately needed for payment of taxes.

The government has the same pricing options with its money of any monopoly supplier of an absolute necessity. An analogy can be drawn, for example, with an electric utility monopoly although taxes give the currency monopolist a tool to regulate demand that the electric utility monopolist does not have.

How does the monopolist price his product? There are two options:

Set price, p, and let quantity, q, float, or

Set q and let p float.

The first option is generally preferred, with a gold standard or the proposed ELR program two examples of using the first option.

However, the government is currently employing the second option. It sets a budget that determines q (spending), and lets the market determine p (price level) as all purchases are made at market prices. If the monopolist decides to set q, and let the market decide p, it must constrain q so that demand exceeds q, or, for all practical purposes, the price of its product will fall towards 0. Government constraint of q to control p means using continuous unemployment and excess capacity to maintain price stability. Surely this would never be considered a viable option in running an electric utility monopoly, for example.

A gold standard uses the monopolist’s alternative of setting p, in this case the price of gold, and letting q, the quantity of government spending and lending, float. Taxes create demand for the currency. The government sets a price at which it will buy and sell gold, and makes all other purchases at market prices. It is then fiscally and monetarily constrained to a policy that spends little enough on non-gold items, and adjusts interest rates, to maintain a desired buffer stock of gold. The government must limit its non-gold spending to less than the demand for the currency created by taxation, so the excess demand for the currency is evidenced by gold sales to the government. Excessive non-gold spending results in gold sales to the private sector. As long as the buffer stock and legal convertibility are in place, the price of gold set by the government is the currency’s value. All other prices float at market levels and reflect nominal value relative to the set price of gold.

Microeconomic theory details the logic, which concludes that a monopolist, controlling an absolute necessity, sets price, one way or another. The ELR proposal uses the option of setting one price, the ELR wage, paying market prices for other purchases, and letting the total quantity of government spending be market determined.

With a gold standard, gold can always be considered fully employed as gold can always be sold to the government at the fixed price. Likewise, with an ELR policy, labor can always find a buyer.

The Paradigm Constraint

In no case must the government fund itself in dollars. Spending is limited by what is offered for sale, not by revenues. Taxes function to create a need for dollars, so the government can use dollars to purchase real goods and services. Borrowing functions to allow excess dollars created by deficit spending to earn a positive rate of interest. Deficits pose no funding risk since borrowing need take place only after spending, and only to support and maintain a desired interest rate. Interest rates and prices are subject to exogenous control by the issuer of the currency.

There is no evidence that government understands this paradigm. Government budgeting assumes the paradigm that dollars must be raised through taxing or borrowing to fund expenditures at market prices. The monopolist (the government) has decided to let market forces price its product (dollars). Therefore it must constrain the quantity of spending to maintain sufficient unemployment and excess capacity to prevent a decline in the value of its product (inflation).

Unemployment

Unemployment is defined as idle labor offered for sale with no buyers at that price. It will occur when the private sector, in aggregate, desires to work and earn the monetary unit of account, but doesn’t desire to spend all it would earn if fully employed.

Post-Keynesian monetary theory reveals the essence of involuntary unemployment. Its term ‘radical endogeneity’ asserts all deposits are the accounting records of loans, and deposit money exists only in conjunction with outstanding bank loans. If, therefore, in the private sector one agent wishes to increase his holdings of net financial assets, H(nfa), this desire can only be satisfied by the reduction of another agent’s holdings of H(nfa). An agent’s net financial assets are reduced whenever either the agent increases its outstanding debt, or reduces its stock of financial assets. Net financial assets are increased by paying down debt or by increasing the current stock. In the absence of financial intervention by the government, if one agent desires employment in order to increase his holdings of financial assets, another must decide to reduce his net financial assets for a transaction to take place. If no agent is willing to reduce his net financial assets, the desired sale of labor does not occur. This is defined as involuntary unemployment.

The national accounting double entry bookkeeping system is always in balance. Entries on one side of the ledger must be accounted for with offsetting entries on the other. Investment, for example, is accounted for as savings in national income accounting, so, by definition, total investment will always equal total savings. Government deficit spending is classified as government dissaving, and the offsetting accounting entry is an increase in net private sector nominal savings. Thus, whenever the government engages in deficit spending, aggregate private sector H(nfa) is increased, with H(nfa) including offshore holdings of dollar denominated assets. Furthermore, the level of government deficit spending determines private sector H(nfa). Should the private sector desire to increase its H(nfa), this desire can be satisfied only by an increase in government deficit spending.

Unemployment can therefore be summarized as follows:

Involuntary unemployment is evidence that the desired H(nfa) of the private sector exceeds the actual H(nfa) allowed by government fiscal policy.

To be blunt, involuntary unemployment exists because the federal budget deficit is too small.

Furthermore, if an agent wants to sell any real goods, and thereby increase his H(nfa), this too can only be accommodated by another agent decreasing his H(nfa). If the desired H(nfa) is greater than the actual H(nfa), the evidence is involuntary inventory accumulation and a contractionary bias.

H(nfa), Aggregate Demand, and Aggregate Supply

The understanding that unemployment is evidence of the government deficit being too small is consistent with the standard concept of aggregate supply and demand. Aggregate demand is the sum of all expenditures, and aggregate supply is the sum of all goods and services offered for sale. It can then be stated that if the private sector wanted to use some of its full employment income obtained by selling real goods and services to be held as H(nfa), the evidence is some combination of involuntary inventory accumulation and involuntary unemployment. Involuntary unemployment is thus traced to a desired H(nfa) that exceeds actual H(nfa).

The aggregate supply and demand approach allows changes of desired H(nfa) to be expressed either as a change in aggregate demand or a change in aggregate supply. The H(nfa) approach focuses only on the control variable-desired H(nfa)- regardless of whether it is aggregate supply or aggregate demand that is excessive or deficient. In fact, it may always be impossible to distinguish a shortfall in aggregate demand from an excess aggregate supply, rendering the distinction unnecessary.

The $12,500 Price Constrained Incomes Policy

The proposed ELR policy and its version of full employment and price stability are a logical extension of the correct paradigm of a tax driven currency. Since the private sector needs the government’s spending to pay taxes, government constraint of the size of the ELR wage, rather than constraint of the quantity of dollars it spends, results in a form of price stability. H(nfa) can be determined directly by the private sector as it decides the total quantity of ELR labor it sells to the public sector. The government sets the ELR wage and lets the market allocate all other resources accordingly. This is the same process that determines relative value under a gold standard. Under the ELR proposal, the government adjusts fiscal and monetary policy to maintain the ELR pool much the same way that a government adjusts fiscal and monetary policy to maintain a buffer stock of gold with a gold standard.

Price stability under an ELR policy is similar to that under an incomes policy. With an incomes policy, however, a budget is still targeted, so it is unlikely that actual H(nfa) will match desired H(nfa). Too small a deficit will result in unemployment. Too large a deficit will be inflationary and 1) reduce the relative standard of living of those subject to the incomes policy, 2) introduce incentives for violating the wage and productivity laws, and 3) in general, create an emotionally charged social debate that results in a series of politically determined solutions.

The ELR proposal establishes a minimum wage standard, as the government is willing to employ anyone at the ELR wage. It also provides a brake on private sector wage increases that are not related to productivity increases, as employers have a pool of government ELR workers from which they can draw. Also, employees recognize that ELR workers may replace them, though the cost to the employer will depend on the qualifications and training necessary to perform the task the employer desires. In this way, a nominal wage scale emerges. The value of the currency is the ELR wage, since that is what the government, the monopoly supplier of its money, has decided it will pay. Other wages are subject to market forces.

The initial ELR wage can be set at any level as market forces will align all other wages and prices. To minimize disruption, an initial ELR wage should be one that is not so high as to draw workers away from the private sector, and not so low as to require a general deflation to bring actual H(nfa) in line with desired H(nfa). For example, if the ELR wage were set high enough to attract workers from the private sector, a one-time adjustment would take place. Net government spending would rise as the ELR workers were added to the government payroll. Private sector output would decline as workers left their jobs, and private sector income would rise from the higher paying ELR jobs. Businesses would then have to pay more, both to replace lost workers and to retain their other workers. Prices would rise as both costs and incomes were being pushed up. The converse holds if the ELR wage is set too low. This would be evidenced by a slowdown in sales as private sector income was insufficient to realize a desired H(nfa) and purchase the output of business. Increasing inventories would lead to layoffs and downward pressure on the price of labor. Eventually, more workers would find their way to ELR jobs and government spending would rise. At some point prices would stabilize in line with the ELR wage. $12,500 per year was selected as the ELR wage for this proposal. This is a bit higher than the current minimum wage and might result in a small one time upward adjustment in the price level. My bias was to err slightly on the high side, rather than risk an initial deflation.

Under the ELR program, changes in desired H(nfa) result in, and are evidenced by, equal changes in actual H(nfa). For example, if the private sector desire for H(nfa) increases, involuntary unemployment that would occur in the absence of an ELR policy will, instead, result in additional labor being sold to the government for $12,500 per year. This increases government spending and the deficit, allowing actual H(nfa) to increase to the level desired by the private sector. In other words, if the deficit increases by $50 billion, that number, by definition, matches the private sector’s desire to net save financial assets. The currency, meanwhile, remains defined by the labor that can be purchased for $12,500. Furthermore, not providing the desired H(nfa), and letting unemployment remain at current levels, would define a deflationary and contractionary bias.

Conversely, if desired H(nfa) decreases, perhaps due to increased non-ELR government spending or behavioral changes in the private sector, an opposite bias is introduced. The government will begin to lose its $12,500 workers to higher paying jobs in the private sector. This reduces government spending. It could also increase tax liabilities, further reducing net spending. H(nfa) is thereby reduced, until it matches the H(nfa) desired by the private sector. If fiscal policy is such that all of the $12,500 government workers are hired by the private sector, then the market price of ELR labor has risen beyond $12,500, and the currency has been redefined downward accordingly. It is the equivalent of the government losing its buffer stock of gold under a gold standard. Additionally, unlike gold, non-homogeneous labor means that as the pool of ELR workers shrinks, the remaining ELR workers would be increasingly less valuable to the private sector, and the currency may begin to get redefined downward at an increasing rate. Indeed, if the remaining ELR workers have no value to the private sector, continued shrinkage of the ELR pool may be impossible, and government spending increases or tax cuts designed to reduce the size of the ELR pool might result only in a devaluation of the currency. To regain control of prices, the government could act to offset the reduced desired private sector H(nfa) directly and restore the ELR pool to a desired level by cutting spending or raising taxes. It could also attempt to indirectly raise desired H(nfa), by changing interest rates; introducing tax advantaged savings plans, etc. Such efforts would be designed to trigger a deflationary private sector slowdown that would result in a reduced demand for private sector workers above the $12,500 ELR wage, and workers finding their way back to the $12,500 ELR payroll. If this were deemed too disruptive, the same fiscal constraint could be matched with an increase of the ELR wage, say, to $15,000 per year. This would redefine the currency downward to that level- presumably the perceived market level that wages had gone to at that time. Prices would stabilize around the new benchmark as desired H(nfa) and actual H(nfa) correspond to a desired buffer stock of $15,000 ELR workers. The question of the appropriate size of this pool of workers would be somewhat analogous to the current debate over the current natural rate of unemployment.

The ELR can be considered a labor standard policy that continuously defines the value of a dollar by the quality of ELR labor that can be hired at a given price. Since labor is not homogeneous, the value of the dollar will, by definition, fluctuate with the quality of the labor that $12,500 purchases. This carries an implied cyclical tendency towards increasing money value during periods of private sector increases in desired H(nfa), and vice versa. For example, layoffs in the private sector would result in additional $12,500 government workers of higher quality than the existing pool. This would enhance the investment environment for foreigners as well as domestics, as better workers could be hired for the same nominal wage. Also, any increase in the attractiveness of the ELR pool, such as a higher level of education, would both increase the purchasing power of the currency and increase the value of the currency in the foreign exchange markets. A well thought out ELR plan would include a well-organized program to educate, upgrade skills, and make productive use of ELR workers.

This type of fluctuation of the quality of the labor available for $12,500 technically constitutes price instability, as the currency is being constantly redefined at the margin by the quality of the best worker in the pool. This does not, however, necessarily represent an increase in price volatility of goods and services over the current system which uses a pool of unemployed, i.e., the concept of a natural rate of unemployment, to stabilize prices. Nor does it imply that the resulting price instability due, for example, to an increase in the general level of education, is undesirable.

Defining the dollar by the ELR labor that can be purchased at the margin does not mean all prices will be constant forever. To the contrary, all other prices, including asset prices, will be constantly changing as the market allocates via price. Only one price, the ELR wage, has been used to define the currency. All other prices result as the forces of supply and demand settle on nominal prices that reflect a value relative to the ELR wage and continuous full employment.

Most proposed incomes policies extend government regulation into the private sector, requiring, for example, documentation that wage increases not exceed productivity increases. The proposed ELR program, however, recognizes that it is only necessary to constrain the prices the government, itself, pays. By allowing the private sector to realize desired H(nfa) through the market process, market forces will link wages to productivity. For example, an available-for-hire pool of ELR workers means private sector employers will not be forced by shortages of unskilled labor to increase wages. More productive employees will be able to command a higher wage, though general productivity increases by business will not result in higher wages if a given job can be performed equally well by a $12,500 ELR worker.

This program does not necessarily defeat the real business or inventory cycle. It does use the proposed $12,500 public service job to absorb fluctuations of private sector employment, allowing the private sector to achieve its desired H(nfa) on a continuous basis. This neutralizes any monetary system bias implied currently by a government policy that does not allow actual H(nfa) to match desired H(nfa).

ELR V.S. Unemployment Compensation

The value of a currency is determined by what the government demands the private sector must do or sell to obtain it. Unemployment compensation is payment for not working. If everyone could simply stay home and collect a government check, not be stigmatized, and thereby obtain all currency necessary to pay all taxes due, the currency would have no value. Therefore, under current policy unemployment compensation must be limited, temporary, and an insufficient source of revenue for the private sector to meet its tax obligations and desired H(nfa).

The ELR program, on the other hand, requires the employee, at a minimum, to sell his time. The ELR program therefore need not be limited, as the currency will maintain its value regardless of the quantity of ELR spending. The value of the currency will equal the effort necessary to earn the ELR wage.

Past Attempts at Government Sponsored Full Employment

With a private sector desire for H(nfa), and a government that fails to run a deficit large enough to accommodate that desire, the corresponding unemployment can be severe. It may eventually be reduced by a reduction in desired H(nfa) because of lower interest rates, or, as some contend, by falling wages. However, the time necessary to test this hypothesis is usually beyond human tolerance, and the pragmatic view of government employment arises.

For example, from 1931 to 1941 unemployment averaged well over 10% – the definition of a depression. It hit a high of 24.9% in 1933, and was still 14.6% as late as 1940. GNP reached a high of $203.6 (billions of 1958 dollars) in 1929; fell to a low of $141.5 in 1933, and by 1939, had crept up only to $209.4. Low interest rates were not enough to decrease desired H(nfa). Short term Treasury securities reached a high of just over 5% in May of 1929, were cut to the mid 3% range in November 1929 following the stock market crash, and were as low as about 0.5% by September 1931. Rates were increased to about 2.5% until May of 1932, and then remained well under 1% until 1948. Continuous low interest rates also did not seem to result in run-away asset prices. The Dow equity index price did not recover to its 1929 highs until 1958, the 1927 highs were not reached until 1946, and the low of 1930 was not surpassed until 1936.

In 1933, after several years of undesirable unemployment and depressed GNP, the Public Works Administration, the first public works program, was enacted. It was followed by the WPA in 1935. It is noteworthy that these programs did not come about until after several years of troubling unemployment, and fell short of solving the unemployment crisis and ending the depression. Work relief never reached more than 40% of the unemployed, and only 3 million of the 9 million unemployed participated in the WPA. The reason these programs were constrained was the reluctance to engage in government deficit spending. During the 1930’s, in spite of the high unemployment and depressed growth, budget balancing was never far from the forefront of political purpose. Belief in a balanced budget prevented government relief programs from ending the depression, and when Roosevelt honored his 1936 campaign pledge to balance the budget in 1937, the economy suffered a major setback with unemployment jumping back to 19.1% from a seven year low of 14.3%. Public works programs that were ‘paid for’ by other spending cuts or by tax increases could not reduce unemployment as there was never enough net government spending to accommodate desired H(nfa). The largest deficit of the 1930’s was 5.9% of GNP in 1934, and it was down to 0.1% of GNP by 1938. The U.S. was on a gold standard, and policy had to include managing the national gold supply. This led to various extremes such as suspending domestic convertibility in 1934, and making it illegal for domestics to own gold, as well as strong support for balancing the federal budget.

During WWII, a radically different approach was initiated. Government spending exceeded tax collections in 1942, 1943,1944, and 1945 by 14.5%, 31.1%, 23.6%, and 22.4% of GNP respectively. Unemployment was under 2% by 1943, and output increased from $209.4 (billions of 1958 dollars) to $337.1 by 1943. Prices were fixed, and government planning agents from the Office of Price Administration enacted rationing. Great effort was taken to ensure that rationing was perceived as equitable ensuring public support for the program. Patriotism kept Americans from black markets that may have otherwise drained resources needed for the war effort, and patriotism also became associated with nominal savings. The idea was to get desired H(nfa) up to the level of deficit spending in a low interest rate environment. In other words, hoarding of dollar denominated financial assets via government bond purchases was encouraged, allowing the government to purchase up to 60% of the real output without price competition from consumers. The desire of the American public to earn money and not spend it, which caused the unemployment of the previous decade, now dovetailed well with the public sector demands for war production, and unemployment was, for all practical purposes, eliminated.

Foreign Trade

Transactions of real goods and services between those within the geographical confines of the U.S. and anyone outside the U.S. are generally defined as foreign trade. Exports are real goods and services leaving the country, and imports are real goods and services entering the country. By standard definition, exports are a real cost, and imports are a real benefit. Exports can be considered the cost of imports. Financial transactions are accounting information, and not considered as imports or exports.

The chronic U.S. trade deficit, for example, means the dollar price of imports continually exceeds the dollar price of exports. This puts increasing numbers of dollars in the hands of non-U.S. residents who have decided to hold dollar denominated financial assets rather than use their dollars to buy U.S. goods. This is an identity, for, if they did buy U.S. goods, there would not be a trade deficit. As holders of dollar denominated financial assets, they are net nominal savers, much like any domestic holder of dollar denominated financial assets. For purposes of this analysis, foreign dollar denominated financial holdings are considered part of H(nfa).

Currently, most of the world allows currencies to trade freely. Occasionally the major central banks will intervene in the foreign exchange markets, and buy or sell one currency versus another for a variety of reasons and motivations. However, most central banks are not legally bound to guarantee convertibility of their home currency to another currency at predetermined rates. Exceptions include a few currency board systems as Argentina and Hong Kong. Should a foreign holder of dollar denominated financial assets desire to switch to another currency, he must find, in the market place, another agent who wishes to be his counter party. If a transaction does occur, the dollar denominated financial assets will change hands but not increase or diminish. The exchange rate will likely fluctuate, but the quantity of dollar denominated financial assets remains unchanged. Dollar H(nfa) is not changed by foreign exchange transactions that do not involve the Federal Reserve acting for its own account.

The desired H(nfa) of the foreign sector is a factor since it is part of the total desired H(nfa). A declining dollar in the foreign exchange markets becomes indicative, again by definition, of decreasing desired H(nfa) of the foreign sector agents, and vice versa. The number of $12,500 public service employees under the ELR employment proposal will fluctuate with changes in the desired H(nfa) of the foreign sector as well as the domestic sector. It is total desired H(nfa) that controls the number of these public service workers. Increased government deficits that arise when the pool of $12,500 ELR workers increases always match the desired H(nfa) of the entire non-government sector. The dollar remains defined by the available workers, so changes in the value of the dollar in the foreign exchange markets must be a function of the quality of the ELR labor available for $12,500 and the changing value of the other currency.

This understanding allows policy makers the option of taking advantage of the benefits of being a net importer. For example, an increase in net imports that results in the loss of private domestic employment will immediately result in an increase in the number of government $12,500 workers. This increases government spending (and the budget deficit) which may result in other industries hiring workers away from the government. If the pool of $12,500 ELR workers is deemed by the electorate to be too large, taxes can be cut or public spending increased until the number drops to the desired level. The public would associate higher trade deficits with an increasing standard of living, lower taxes, and other such benefits.

A fixed exchange rate would present problems similar the gold standard since the gold standard is, for all practical purposes, a fixed exchange rate system. If the Federal Reserve was committed to convert dollars to other currencies, a larger budget deficit or trade deficit could result in the rapid depletion of the Fed’s foreign currency reserves, forcing the suspension of convertibility and a return to a market system.

Interest Rates and Employment

Anyone who lives entirely on his interest income may otherwise need employment. Such rentiers have removed themselves from the labor force. To the extent that higher real rates increase the rentier population, potential output is reduced. Furthermore, those left working are, in real terms, supporting those living on interest income

The concept of scarce jobs has led to a variety of programs designed to reduce the work force to limit unemployment. These include child labor laws, education for veterans, aid for single mothers, and even social security. These programs were ultimately unsuccessful at reducing unemployment, no matter how many potential participants they eliminated, as a given percentage of unemployed became a tool to limit price and wage increases. The real result of reducing the labor force is reduced output.

Lower real interest rates will tend to keep more individuals in need of employment. Combined with a well run ELR policy, low rates should increase output dramatically with much of the increased output being investment. It may be possible, for example, to repair, rebuild, enhance and maintain the public infrastructure without a decrease in private consumption from current levels.

Conclusion

It is widely assumed that deficit spending to hire unemployed workers carries at least two risks- inflation and funding. The inflation risk comes from the failure to understand exogenous pricing. It is feared that deficit spending will cause an implied upward bias on labor costs from both the aggregate demand created by the deficit spending, and the elimination of the competition of the unemployed for available jobs. The result is an anti-inflation policy that requires excess capacity in the private sector to keep market prices from rising. This includes the need to maintain a pool of unemployed to discourage wages from rising. The second perceived risk, funding, comes from the widely held misconception that the government must be able to fund itself to carry on spending. The government is, therefore, concerned not only with how the market will receive the debt it believes it needs to sell in order to fund itself, but also concerned that there may be a market determined funding limit. Until these perceptions change, a pool of unemployed workers will be necessary to contain inflation, and deficit spending will be resisted.

The Keynesian mainstream proposes ending unemployment by increasing aggregate demand through low interest rates and increased deficit spending. To offset the inflation risk inherent in this policy many Keynesians propose various government legislated incomes policies. These require the direct government regulation of private sector wages, usually attempting to link wages with productivity. This has been rejected by the electorate, who seem to prefer the excess capacity approach to price stability.

The proposed ELR program recognizes that the government is a monopoly supplier of its currency. Price is set through the ELR wage, which defines the purchasing power of the currency. Further recognized is that deficit spending poses no financial solvency risk to the government.

The government, as employer of last resort, is not a new concept. What prevented such policies from being viable and sustainable in the past – the gold standard and other fixed exchange rate policies- are long gone. We currently have a monetary system that can accommodate both full employment and price stability on a permanent basis.

This ELR proposal is a logical extension of Keynesian and Post- Keynesian thought. Endogenous money is already deeply rooted, and the idea that an incomes policy need only be practiced by the government with its ELR wage should not pose any philosophical barriers. Nor should classical economists and their offspring be entirely against such an ELR program. If they are correct, there would eventually be an equilibrium condition with the ELR pool dwindling to 0.

Endnotes

The Author is a partner in the Investment Firm Adams, Viner and Mosler, and wishes to acknowledge the help of the following (alphabetical order):

160 Responses to Full Employment AND Price Stability

I think this ELR is a great idea. We should do it now. But regardless of what sensible people like you and me think, there will be too many who see it as big government for the present political climate. So given that the government probably won’t do it any time in the near future, what about a private effort of some sort? Get some like minded people together, hopefully a few with some money, and start a private charity. There is also the possibility of getting the private sector involved in exchange for pr and/or free advertising. Companies could perhaps earn something akin to Fair Traid status for becoming members of a put your country back to work network. Or what about starting with the government simply being an employment agency of last resort, becoming properly active in facilitating the networking process of bringing employers and employees together and/or startups and employees together? You could cut down on unemployment a lot if simply the job hunting process wasn’t so inefficient.

As to what people working for ELR could do, I am amazed so many people ask. They need to watch more science fiction. The list of optional improvements to life goes on and on. Unemployment could be seen as an opportunity. Bring on the 24th century. But you could start with finding uses for what people are doing and not getting payed for. For example there is no excuse for having unemployed scientists still doing research and publishing and not getting anything for it. There are unemployed people out there doing creative work all over the place that may to be worth giving the highest honors to or being put into an art museum, but nonetheless could be put to enough use to be worth minimum wage. I think of a friend of mine who never could keep a steady job, but earned easily more than the unemployment benefits she got in her direction of amateur dramatics productions in the community. On a more practical level, low private sector unemployment times could simply be seen as times to do more investing in the long term. America’s highways are a mess. The last time I was there I thought at first the rental car had a flat tire. But as I said earlier, if the government *seems* to be too short of funds to take care of things like that, perhaps the quick and dirty compromise would be go after private sponsorship like the adopt a highway scheme in California. It may kind of creep me out to see signs like “This public works project helping your community and putting America back to work, is payed for by McDonalds”, but it’s better than not having it at all and enduring endless discussions about how we can’t do this or that, because it is too much big government.

@WARREN MOSLER, Perhaps I should have put big government in quotes. The point being that the perception may be more important than the reality. I’m with you on the whole thing, though. So with you, that I’m too impatient to wait for the government.

Warren
i’ve read all the article twice but not read all the comments
but what i think is not clear (at least to me…)
it’s if fiscal deficits lead to a devaluation of the currency in the forex market
on mmt blogs i didn’t find an analysis of the impact of fiscal deficits on the forex market
can u tell me some sources about this issue pls

Warren,
are you telling me that MMT doesn’t bother of the possibility of an impact of fiscal deficits on the forex market?
how can MMT prescribe fiscal deficits (in some circumstances) without tackling this issue?

1. The effects of increased government deficits on fx are unclear. On the one hand there is the mainstream view that the increasing “money supply” should cause the fx rate to fall. And initially, there could be a widespread *belief* that fx-rates should fall, which would indeed cause them to fall. These effects are not completely implausible. If it is anticipated that a falling fx rate would hurt certain sectors – that an immediate transition to MMT policy would be very painful – this should be taken into account. Perhaps it is deemed necessary to go slower than otherwise – even through there are certainly costs for that as well.

2. On the other hand, the government deficits should not be larger than the non-government net saving intentions. That is arguably the “natural” size of the deficit – corresponding to the “natural” – or “appropriate” – fx rate! If a smaller deficit yields a stronger fx rate, then arguably this fx rate is “artificially” strong.

3. Longer term, MMT policies should lead to improved productivity. This should attract foreign investment capital, perhaps offsetting any initial decline in the fx rate.

Clearly the foreign exchange relationship is much more complicated than simply interest rates and quantities of financial assets. There is a whole host of variables here defining a dynamic relationship that defies simple gut reaction analysis. It’s complicated.

There is no evidence that the Asset Purchase function has caused any devaluation of Sterling. Another myth to file in the ‘Neat, Plausible and Wrong’ category.

if MMT tells us we should not worry about fiscal deficits
MMT must have some ideas of the consequences of fiscal deficits on the forex market
i mean how can we let the deficit float freely if this has consequences on the forex market? how can we just not worry about it?
i don’t think we can pass over this issue stating that the effects are unclear…

MMT concerns itself with the purchasing power of the dollar. The value of the dollar against other currencies is merely a component of this. There is no need to worry about a particular dollar fx rate any more than one should worry about the price of any particular commodity in dollars.

That being said, there has been no more bullish sign for a country’s currency than the start of a policy of higher fiscal deficits combined with higher interest rates. George Soros’ protege Stanley Druckenmiller mentioned this in The New Market Wizards I believe.

but if we are running fiscal deficits to get full employment and these deficits lead to a devaluation in the forex market, then we could have inflation and according to mmt we should raise taxes or cut spending in order to curb inflation
and that prevent us to get full employment
so IF fiscal deficits lead to devaluation of the currency then we cannot get full employment and price stability
where am i wrong?

Rising prices are not an inflation in the economic sense. Rising prices are a reduction in the standard of living.

Inflation is one of those irritating words like savings that is very Humpty Dumpty like – tons of definitions depending upon the particular prejudices of the writer.

“but if we are running fiscal deficits to get full employment and these deficits lead to a devaluation in the forex market”

The US is running colossal deficits right now and the value of the dollar is going up.

So is the UK and our exchange rate is relative stable and increasing against the Euro.

So this idea that increased money supply = decreased exchange rate is another neo-classical myth designed to frighten people away from changing the status quo. The reality is much more complex than that.

Remember that all MMT does is maintain the strength of the financial flows through the monetary circuit at somewhere near the maximum values the system can withstand. That is positive for real output and means the economy is more valuable, not less.

Lots of low-wage (many higher than minimum wage) jobs now lack benefits such as child care and health insurance. ELR would undercut those jobs, and impact the economic viability of the industries that employ those workers. Group health insurance alone costs over $12,000 a year for a single worker (more with dependents), or $6 an hour. Maybe we’d be better off without any fast-food restaurants, but there are other industries that might have a net societal benefit.

Should the ELR cash wage really be set at or near the current minimum wage, so that including benefits the compensation is 2-3 times the minimum? Are those industries to be forced to rely exclusively on part-time students for their labor? Are there enough students in the labor force to replace all the full-time adults now employed in low-wage / no-benefits jobs?

Yes, in your documents and Randall’s it mentions what happens if the ELR compensation is slightly more attractive than the minimum wage. But $8/hr plus full medical and child care is HUGELY more attractive than the minimum wage.

So, a worker mow making $16 plus full medical and no child care (I saw somewhere recently that this is the average) would have to be adjusted to $24 plus child care, or in a cafeteria plan maybe $30 if no child care was needed. Almost double. Would that not be quite disruptive, and would not prices also have to rise quite a bit in order for employers to stay in business? What happens to the terms of trade if we double the average wage, and we’re already highest in the world? Net savings by ROW could skyrocket, export industries could have massive layoffs, necessitating an even bigger deficit, no? Is that even politically possible, never mind economically desirable?

Would you not phase it in somehow, so as to give things time to adjust? Let people stay on welfare and unemployment as ELR is ramped up, and convert gradually as ELR becomes more attractive? And if so, maybe you could have more success advocating a pilot program, so that the positive results could attract more supporters to your cause?

why not separate health care and child care – and make them universal and public?
That way businesses won’t have to compete with government and trying to provide for it – or having to raise the wage to compensate for not providing it.

I agree that it could be better.
My point was – that if there was no public education – and only private – it would be unaffordable for some, and also it would be another expense that people would have to save for. Like healthcare, or child care.
Public services do make the life easier and less stressful.
There is always room for improvement though.

“But I think studies show that reading and math test scores have remained relatively stable over the last 40 years, so I don’t think public education has gotten any worse.”

The tests have changed, though (“dumbed down”), and the math skills, at least those used in everyday life, have greatly deteriorated. Thank &deity for computers, or the young cashiers of today wouldn’t even be able to make change. If you want to be looked at like you have three heads, try giving one $21.25 to pay for a $16.14 purchase.

The worst tragedy of our public school systems is that they are failing their very poorest clients, who typically haven’t the power to take their business elsewhere. The poor education in poor neighborhoods is perpetuating an underclass of low-skill, low-earning workers. It’s not because we can’t do it, or because we can’t afford it. Some of the highest-cost schools are among the worst performers, and our students from the rich suburbs compare favorably to students anywhere in the world.

The parents in the underperforming schools are unhappy with the results, and the taxpayers funding the underperforming schools are unhappy with the high cost and the results.

“My point was – that if there was no public education – and only private – it would be unaffordable for some, and also it would be another expense that people would have to save for. Like healthcare, or child care.”

How about publicly funded, but permitting private providers. AKA a voucher system.

I’m still concerned about the sorts of things the ELR workers will do, and the size of the total benefits package relative to current low-wage employment.

Wray suggests that the child-care benefit would be provided to ELR employees by ELR employees. I would think that such an arrangement would undercut existing child-care workers in the private sector, and run afoul of government-imposed licensing and certification requirements. It takes a good deal of screening and training to become a licensed day-care provider, and they can charge more per hour (especially for multiple children) than the current minimum wage.

Many a Mr. or Mrs. Mom is not working today because the family would be worse off to have both parents working if they had to pay for child care (in addition to increased taxes, transportation, etc.), or because the net financial benefit is not enough to justify the effort, and overcome the loss of bonding time with the children. They might, however, go for an ELR job because the total compensation package is way larger than their private sector alternatives. Is that an acceptable cost (I mean the effect on the kids of the reduction in parenting time), or does the program have to be modified to exclude them?

Yes, but what about the work. Not “there is always more to do…”, but specific examples of products to produce and services to perform. Randall mentions shopping and gardening for the frail elderly, for instance, as a “core” service, to become a permanent part of government. What would be the transitory or variable services that would be reduced or discontinued when private employers hire the ELR workers away?

Oh, duh! This is so easy, I can’t believe all you Economics Professors couldn’t explain it better.

Fixing the price of labor is different than fixing the price of gold, or apples, or any other good in the economy. That’s because labor is the source of income, and income is what funds consumption.

If wages, and incomes, and consumption do not change, there is no way there can be a GENERAL increase in prices, absent an equivalent general decrease in quantities. (Which, if it happened, would lead to lower employment, incomes, and consumption – a recession).

Some prices could go up (even oil), but if the cost of labor is held constant, other prices must go down. Only if the cost of labor is allowed to rise, can incomes rise and consumption rise in order to consume the more expensive oil AND continue to consume everything else at the same rate.

Fixing gold doesn’t work that way. Under a gold standard, changes in the supply/demand balance for gold are transmitted directly to the currency, causing either inflation or deflation, I would say “by definition”, if you define it to mean a change in the value of the currency relative to all goods and services in the economy, which is the other side of saying a rise in the general price level.

“The UMKC has run a continuous fiscal buckaroo deficit in that, from inception, it has always spent more buckaroo than it has collected.”

There must be some Buckaroos under the rugs in the dorm rooms, then. Where do they go, if they are not used to pay the tax? More and more of them each year. If the excess had remained in circulation, at some point the student body would have saved enough Buckaroos, and they would no longer do more work than was needed to pay their taxes, and there would be no deficit.

If the “lost” Buckaroos are found someday, will they not force the $ value of a Buckaroo way down?

Or, perhaps, the seniors are taking their Buckaroos with them. If not, then Seniors would sell them to the incoming Freshmen, (driving down their $ price) and after 4-5 years the total Buckaroo savings would stabilize, and no additional Buckaroos would need to be saved. Then the “budget” would be “balanced”.

It is not credible that students as a group would want to save more and more Buckaroos every year. They must be vanishing from the money supply, which is the equivalent of taxing and shredding them, which would also be a balanced budget.

(Not economics per se, but maybe some of the students enjoy doing the charity work and keep doing it even though they need no more Buckaroos, and they shred their excess buckaroos themselves.)

Is there an observable disappearance of money in the real economy, as if it had been taxed away, or buried in the back yard and never found again? If not, then only an ever-increasing need for savings could drive perpetual budget deficits. This would be possible, even likely, in a growing economy. Especially when the biggest demographic group is approaching retirement age.

When boomers are all retired, and engaged in massive dissaving, will deficits still be appropriate?

I had to look up “Procrustean”. That gets to my biggest concern, I think. Warren tends to dismiss it as being out of scope, as it concerns how our politicians will manage things, even if they understood all this. In our current system, we define a budget starting in February or so each year, for the following fiscal year that starts in October. So it’s 8-20 months between deciding how much to spend and tax, and actually doing it. A lot can change in that amount of time.

There are some automatic compensators, and there is error in the estimates of taxes and growth, so it’s not an exact science even at best.

My question is, since all the math seems to apply to a single period, when would a large increase in deficit have an effect on the economy? If we spent an extra $100B this month, and budgeted to do so every month for the next 12, would we see the effect starting this month, or next month? Or perhaps in 18-24 months? How does one steer the ship if the delay is long?

And, even if we could agree on an MMT-sized deficit for today, how can we know what the proper size will be in the budget year that starts 8 months from now? Can we react in time in mid-year, if we see that our budget projections were wrong? Do we need shorter-term budgeting? Or structural changes in the laws, besides getting rid of the debt ceiling and such? Can the politics even be done in a shorter time?

So, we do need a more responsive control system. What we are doing now was decided in early 2010. What we will do starting in 1.5 weeks and for the following 12 months thereafter has already been decided.

Well, sort of. Congress hasn’t passed a budget in over 2 years, so we’re on continuing resolutions, and probably will be at least until January 2013.

But, what about the responsiveness of the economy? It cannot be instantaneous, can it? And is it not bungee-like, itself? How can one steer the ship when the rudder response has such a lag to it, and responds so strongly when it does respond?

Tightening? There’s a lot of talk, but I’ll beleive it when I see it. The last “cuts” the Republicans passed ended up creating more spending this year, not less.

You say the ELR process works the same way as the gold standard. Did we not have inflation and deflation under the gold standard, while the price of gold in dollars was fixed? Why would ELR give us price stability, when the gold standard did not?

If it is because the supply of gold could and did change in dramatic fashion, will we not also see similar changes in the supply of labor, as demographics change? And we have a very large such change in our near future, as baby boomers leave the work force.

I had in mind the depressions of the 19th century. My monetary history is lacking. Weren’t we on the gold standard then, and did we not have deflation during those depressions, and inflation at other times, and never changed the gold price? The price of gold, and the general price level in 1913 was about the same as in 1781, but with some severe ups and downs in between?

yes, prices had their ups and downs, which many might call ‘inflation’ but technically if dollar was continuously worth a fixed amount of gold the economist would say there is no inflation, just relative value changes.

If 10 minutes of unskilled labor was worth one apple throughout the period, and one apple was worth 2 pears throughout the period, and one pear was worth 5 ounces of cherries throughout the period, and so on throughout the economy until we got to gold and dollars; and one ounce of gold was worth $22.80 throughout the period, but apples increased monotonically in price from $1 a bushel to $5 a bushel over the course of 20 years, I don’t think you can call that a “relative change”, except that it is a relative change only in the value of a dollar, which is inflation. And then over the next 20 years a bushel of apples went down to $.20, that’s deflation. It’s not the same as an apple rising to three pears or falling to 1/2 a pear.

As I said, my economic history of the 19th century is not strong, and I wasn’t there, but that is my understanding of how things went, pretty much. Or at least my understanding of what is meant by depression and deflation and inflation, all the while fixing the price of gold.

I thought the flaw of the gold standard is that one’s currency becomes victim to the supply of gold, mainly a matter of prospector’s luck, and as such is not a good way to stabilize the general wage and price level.

I like the buckaroos story. It does indeed illustrate several pricinples better than the typical economics text.

But, I wonder what would happen over time if the University decided to accept tuition payments and fees in Buckaroos only? And pay the faculty and staff in Buckaroos. The employees would find a demand for them from students who could exchange dollars for them. But the University would have to pay costs from “outside vendors”, such as food for the dining hall, in dollars. Could they still operate at a deficit if they are a net “importer”? If tuition payments just covered the salaries and other internal costs of running the University? They would have to sell Buckaroos into the student community in order to raise dollars to pay for their imports. Each year, the supply of Buckaroos circulating would increase by the amount of annual imports (deficit). Eventually, there would be plenty of Buckaroos around at low enough prices for the students to pay tuition without doing any Community Service. The Buckaroo would depreciate relative to the dollar, and the University would have to sell more and more of them each year to raise the dollars to pay for their imports. The faculty and staff would receive fewer dollars in exchange for their Buckaroos, and would become dissatisfied and seek employment elsewhere.

I guess the only way this works is if the outside vendors are willing to accept Buckaroos for their products, as Germans are willing to accept dollars for theirs. But Germans can exchange dollars for Euro at will, and they know the exchange rate and commission when they set their dollar-denominated prices. Assume, then (as economists are wont to do) (Don’t feel insulted, my degree is in Economics, too) that there is a local bank which makes a market in dollars and Buckaroos. The vendors can deposit their Buckaroos into their regular checking account, and have them converted to dollars at the going rate. The bank can exchange the Buckaroos to students who need them for tuition.

All’s well, then, the University can create Buckaroos as much as they need to. But, if they always run a deficit, the value of the Buckaroo will fall, their terms of trade will deteriorate, and they will lose employees unless they raise their wages to keep up with the dollar-based marketplace.

Can such a system survive with continual deficits? It seems that what is missing is a desire on the part of the external suppliers to accumulate savings of Buckaroos. The only thing that would make them want to save their Buckaroos is the possibiliity of using them in the future to buy something they want, i.e., a product of the University (since they don’t have to pay the tax, as the students do). The US economy, being more productive and more diverse, can create such expectations. I think that must be the only thing holding it all together. If we fail to create products and services that the rest of the world wants to buy, and our currency is constantly depreciating against other “reserve” currencies … or against gold and silver and other durable commodities that can substitute for reserve currencies … why will they continue to export to us?

The University could raise the tax rate on the students, so that they would buy up the extra Buckaroos created by importing, bringing the system into balance. But then there would not be continual deficits. There would be a “balanced budget”, and stable prices. In fact, isn’t it true that the only way to maintain the Buckaroo/Dollar exchange rate (preventing “inflation” of the Buckaroo) is if the University budget were balanced?

if the school charged buckaroo for tuition, it would have to buy dollars to pay for it’s imports, which means it would direct some of it’s buckaroo spending to teachers and some to dollars and imports.

total buck spending would still be more than the buck tax/fees to accomodate savings, etc.

As long as the desire to save buckaroos increases each year, you’re fine. But what happens when the students have saved all the buckaroos they will need, and desire to save no more?

Well, you need more students, don’t you, or else you have to stop having deficits. Is that what it’s about, we can safely increase the supply of dollars in the world as long as the world’s collective desire to save dollars is not over-satisfied; and growing population and growing affluence supports that desire to save; and when we overdo it, the dollar depreciates, as measured against other currencies or against an hour of labor or a loaf of bread or an ounce of gold.

Well, wages are simply the price of labor. One might argue that it is a cost buried in, and reflected by, the final price of goods and services.

But that argument notwithstanding, an index that included wages (in the spirit of ELR, perhaps only the government-mandated minimum wage) in appropriate proportion, as well as consumer prices, might be a good measure of the true inflation rate?

Has Warren, or Randall, or one of the other MMT professionals calculated such an index, so that we can see what is really going on? Perhaps, even, prove that despite the constant increases in CPI, the belief that we have had constant inflation since 1971 is unfounded?

Or even an index of wages alone? Or the minimum wage alone? When I worked for minimum wage, it was $1.10 an hour, but that was a few years before fiat money. Even if it was $2 in 1971, and I think it was probably not that high then, and it is $8 (?) now, we have had fourfold inflation during the fiat era, and hardly ever even approached full employment.

They say “real” wages have been stagnant or falling for several years now, but that just means they are increasing less fast than prices. If wages and prices both rise in nominal terms, have we not had inflation? And clearly we have also not had full employment.

ALL RIGHT ALREADY, I get the part about inflation not being a rise in the price of any single good or service, or even some partial basket of goods and services.

Are you saying, then, that CPI measures the “cost of living”, and that is some limited subset of goods and services, and not all the prices in the economy? I suppose that’s true, but it has been billed as a representative sample. GDP deflator, as far as I know, is supposed to be all the prices of all the goods and services in the economy. Seems like a large task, so maybe it is also a sample.

What I mean by “flawed” is that these samples might not accurately measure the general price level, which I believe is what they are supposed to be measuring. Maybe I’m wrong about that. Are you saying they’re not flawed because they accurately measure what they are trying to measure, but that is something other than the general price level?

Or are you saying, as Luke is saying, that 2% is pretty OK, and close enough to “stability” that we shouldn’t quibble about it?

I think Luke’s point is that we need to be more conscious about inflation. Look at the recession when house brands flew off grocery store shelves even when the prices of premium brands fell. As the economy has recovered, prices have adjusted a fair bit. Many look at the difference and pay no attention to the mean. Subsidies? Do we take that in to account? Probably not, as few would know who got them and what impact their loss would have on consumer prices. There are a lot of factors that influence the market in one or the other (or many) final sales prices. Still, consumers call it inflation and so it’s an easy political sell, and when we eat their Anti-McInflation burgers we feel satisfied and hopeful for a while. Meet the New Boss. Same as the Old Boss. Better to become familiar with the facts that influence your cost of living before you spend your life running from the Left to the Right and back again, all for no better outcome.

“The measure of actual inflationary pressure is the unemployment rate. This takes inflation to means demand side inflation, i.e., effective demand outrunning the capacity of the economy to expand in order to accomodate it.”

So, when unemployment is pretty high, inflationary pressures are pretty low, and when unemployment is a little lower, inflationary pressures are a little higher, and when unemployment is really low, but not 0, inflationary pressures are quite strong?

Sounds like the Phillips curve to me. Not at all like price stability at full employment.

And in WWII (I wasn’t there, but I heard) there were “black markets” with much higher prices than what the rationing boards set.

I replied once already, but I don’t see it. Must have done something wrong.

“According to the MMT narrative its not a linear relationship.”

The Phillips Curve is not linear either (I guess that’s why it’s not called the Phillips Line).

“Inflationary pressure does not occur while the economy is expanding to accomodate increasing demand.”

To me, that sounds exactly equivalent to saying that there can be no inflation when the economy is at less than full employment. With idle capacity, increasing demand brings forth increasing supply, and that is expansion. But Warren objects to that terminology. Perhaps you can explain the difference?

Back to WWII, I agree the entire population supported the war effort and generally cooperated with the rationing. However, the government-set price was not the market price. Market prices for rationed goods rose, due to the shortages.

Back to #23, if the banana republics had debt denominated in someone else’s currency, their experiences are irrelevant to theory of fiat.

I’ll have to go back and find what I thought was said, but for now …

What is “monetary inflation” vs. “what’s called inflation”. I know we have run out of words, generally, so we reuse them sometimes to mean different things, but in a technical discussion can’t we stick to one meaning per word?

In a response to a reader question in the 7DIF section of this web site, you said:

DEFICIT SPENDING ADDS INCOME AND SAVINGS TO THE PRIVATE SECTOR. IF THIS EXACTLY OFFSETS PRIVATE SAVINGS DESIRES, THERE IS NO INFLATION.

And I glean from all the math in 7DIF and elsewhere, that a government deficit that “exactly offsets” private savings desires will result exactly in full employment, as unemployment is the direct result of private sector savings.

Therefore, whenever there is unemployment, it is because the deficit is smaller than the desired private sector savings, and no inflation can result from that either. In fact, the deficit could even be increased so as to match desired private sector savings, and cause “NO INFLATION”.

How long is “continuous”? Nothing last forever, including excess demand. Do you mean something that is not a temporary spike that is reversed in a short while?

“relative value shifts … that would show up in CPI”

They shouldn’t, if CPI is done properly. Seems to me if there are two goods in the economy, apples and oranges, in equal amounts, and apples go up 10% and oranges go down 10%, CPI should not change. If it does, then it is flawed.

just an fyi, mmt covers the operational reality of both convertible and non convertible currency.

for me, ‘monetary inflation’ is ‘inflation’ that comes from excess monetary ‘demand’ as per what’s called monetary and fiscal policy, and including private sector credit creation which is an offshoot of public policy as well.

other ‘inflations’ include those from the likes of oil price hikes by those with market power. they are generally through the cost side, though interest rate policy works through the cost side as well.

so when opec hiked crude from $2 to $40 over 10 years due to their market power prices would have gone up whether unemployment was at 3% or 10%, for example

So, again with the CPI, I gather you don’t think it accurately represents average prices, but is biased by overweighting goods that are rising in price, and underweighting goods that are falling?

Even if oil went up, and all the things it directly affects went up, would we not both reduce consumption of oil (and the related stuff) and reduce consumption of non-oil (assuming 0 < elasticity of demand < 1 for it all)? And would not reduced consumption of the other stuff tend to put downward pressure on their prices? And prices on average, if the average were properly calculated, would not change? Unless more money were injected into the system to try to accommodate continued consumption of the other stuff even in the face of the higher oil price?

Is it only a flawed CPI and GDP deflator, then, that makes us believe there is monetary inflation when there is not, really?

And as Warren points out below, private sector credit creation is important too. Consider rates and levels of credit expansion in the 1980-2008 period you cited. Then think Baby Boomers. Then think Japan, where nominal inflation has consistently run short of zero in recent times (and where conventional and even “unconventional” policy responses have failed to stem deflation): http://symmetrycapital.net/idlespeculation/20100721_interview_macunovich.pdf

OK, then. Sounds like an area that needs more analytical work, but I guess if short-term riskless rates can be kept to 0, and inflation to 2%, and predictable, then perhaps one will be able to maintain purchasing power without taking on too much risk, using some sort of bond ladder. That would satisfy my sense of justice, which is offended by deliberate stealth of a lifetime’s worth of work and savings.

“Supply side from supply shortage, e.g., competition in the international marketplace for real resources, supply bottlenecks, etc. Most recent inflation in the US has been supply side.”

I don’t see how you can say that, with high unemployment and low factory utilization, and not just in the US but worldwide for the past few years.

There have been disruptions in supply of some commodities, including some important ones like grains, but such things are changes in relative prices, and cannot raise general price levels unless money creation allows for it. Or, as Warren says, unless it is passed through to wages in general, and wages in general have failed, for about 10 years or so now, as I recall, to keep up.

We are now in a global economy. What happens in the ROW affects the US, too.The world is now at the upper boundary of production of food, energy and other vital resources for the burgeoning population. It doesn’t take much to push price up under those circumstances, especially wrt vital resources in general demand. There is pass though wrt energy.

TPTB in the US look chiefly to wages. As long as wages are not rising, then price rises are considered relative. At the first sign of rising wages, the Fed will act to raise rates, but headline is OK since it is historically volatile. But ordinary people are affected by headline and so it is politically sensitive territory. CPI is pretty meaningless since it is designed to limit indexing issues. Plus, the Fed can use CPI to dismiss headline numbers. The headline numbers that have ordinary folks concerned now are mainly food and energy price levels.

Energy is especially high considering the relatively depressed state of the developed world. That’s worrying a lot of people that energy prices will be a brake on growth as the crisis winds down, having a boomerang effect and creating turbulence. And when the effects of climate change start kicking in noticeably, things are going to get interesting.

But there are never oil-driven deflation spikes, when oil drops 70% over the course of 16 years, or 60% in a few weeks. Inflation moderates following the bursting of oil bubbles, but never goes below 0. The inflation spikes associated with oil prices take inflation from 2-3% up to 6-10%, and when the oil spike ends the inflation spike ends, and inflation goes back down to 2-3%. Never 0. Never price stability. There is something else at work besides oil. And, acording to MMT, it is not the money supply and not the deficit. What is it? Public sector wages (where is that data?)? [As a State employee now, I am painfully aware that my public sector wage is nowhere near what I was getting in the private sector, nor is it rising or likely to rise while I'm here. My longer-tenured colleagues have not had raises in 12 years. So, I guess, like the rest of MMT terminology, "public sector" refers only to the Federal government?]

I suspect, and IIRC Warren has stated, a portion of these effects are due to saving by the ownership class that goes into commodities as a new asset class, especially recently, thanks to Wall Street engineering (think Goldman). The advent of ETF’s has also brought the public into an area that was previously occupied almost exclusively by professionals.

For example, available storage space for petro is rented out, including idle tankers. Farmland, too, has become an asset class. I live in Iowa and am aware that farmland has been rising in price. It is up 33% on the year today, according to the morning paper in Iowa City. Contrastingly, there was a companion article saying how the fact that young people are living with parents is reducing demand. Anyone living in Iowa knows that the reason that food prices are rising in the face of lower US demand is that Iowa agribusiness is selling into the international market where demand is hot and also supplying the ethanol industry. Coupled with high prices for diesel fuel and go figure on food prices. BTW. there is very little wage labor in farming anymore in Iowa, since it is all mechanized, and immigrants do the meat packing.

In recoveries, the first price level to rise is assets, since it is the ownership class that has the money and also borrows to leverage, the goods, then wages. Generally, TPTB don’t consider inflation until price level begins to effect workers enough to agitate for higher wages. But inflation begins with assets affecting vitals like energy and food and this begins to get passed through.

Interestingly, oil prices fell from a high of almost 150 to nearly 30 in the pull back, but quickly recovered to the 70-80 range and then rose to the 90-110 range. This was significant because at the time the stim was designed the price of oil was way down. The subsequent rise in price gobbled up the stim.

cpi does drop to 0 and go negative from time to time, but point taken that the trend is generally up some.

Yes, public sector wages for this particular purpose was meant to be Federal.

And public sector wages tend to be ratchets, adjusting up with cpi, but not going down when cpi is negative, though as you state this is rare in any case.

Also, there is some evidence ‘inflation’ follows the interest rate set by the Fed, which makes sense, as
when the fed pays interest, it is turning a given amount of dollars into more dollars. But I can’t quantify that for you- just a hunch

beowulf Reply:September 17th, 2011 at 2:21 am

@Warren Mosler,
Well, to link to Brad DeLong, commenting on Paul Krugman, who cites Larry Summers (did someone forget to add Marty Feldstein and Greg Mankiw to the cc list?) who quotes JM Keynes…Keynes referred to the strong positive correlation between nominal interest rates and the price level, which he called Gibson’s Paradox, as “one of the most completely established empirical facts in the whole field of quantitative economics…”http://delong.typepad.com/sdj/2011/09/gibsons-paradox-and-the-gold-boom.html

You defined inflation twice within the past few posts. That definition is fine with me. I think it is the one MMT has in mind when it states that inflation cannot occur unless there is full employment.

I remember when we used to call them “banana republics”, referring to their inflation, which I recall as being more like Weimar than like the US. I don’t know the details of their monetary history very well, though. Were they on a fiat system, with flexible exchange rates? Were their economies strong to begin with, and did they pursue reasonable fiscal and monetary policies?

In the late 1970’s even the US had relatively high unemployment along with relatively high inflation. “Stagflation”, they called it. I suppose one can blame that on “oil shocks”, and not have to account for such conditions in a more general theory. Were the Latin countries subject to such financial cataclysms when they had high unemployment along with high (even hiper-) inflation?

Deos any of this discussion of abberant conditions change the MMT assertion? Or explain the incidence of inflation under a fiat regime that chooses to use persistent unemployment to dampen aggregate demand?

I may have said something about ‘monetary inflation’ from excess demand not being a problem at less than full employment?

And yes, you can get what’s called ‘inflation’ from things other than excess aggregate demand, as you state.

And the banana republic local currency inflations were usually were characterized by substantial dollar debt followed by selling their local currency to get the dollars to
service the debt, and/or the ‘ruling class’ getting heaps of local currency for themselves via various means and then selling that for dollars. This all tended to drive the local currency down with inflation flooding in through the fx window. The, to keep domestic tranquility, they indexed govt wages to some ‘inflation’ measure which fueled the inflationary spiral as well.

In fact, last I read all the great latin am inflations were traced to said indexation

Starts out in July 2010 at just over 1%. Flat for a few months, then a steady rise to 3.6%, where it is stuck for the last 3 months.

Excluding food and energy, it was under 1% a year ago, now is 1.8%, similarly shaped curve.

The table following the graph says energy is up 19% yoy, though.

Longer term, CPI is 225% of what it was in 1982-4. There were no yoy declines during those 28 years, and oil went from about $30 in 1982-4 to $12 in 1999. It is evident from long-term charts of oil and CPI that the rate of increase of CPI was moderated by oil price declines, which would support your contention that oil is very important. As you say, it directly impacts transportation costs, which impacts the cost of everything that gets transported, as well as the cost of transporting ourselves around. However, it is also clear that something else is causing prices in general to rise, even over periods of many years when the price of oil is dropping dramatically. I don’t think you can say that “most of” that CPI increase was caused by oil. All of the increase from 1983 to 1999 was caused by something other than oil, and occurred despite a 60% or so drop in the price of oil over that time.

Just looking at 1983 to 1999, Monetarists and Keynsians both have a ready explanation for the empirical data. MMT would seem to say that it was not possible to have inflation during this time, with falling oil prices and less than full employment. I would like to think that MMT is the proper explanation of how our modern world works (if not, we are well and truly … you know what, in 2-4 years), but I can’t reconcile this.

Inflation itself isn’t about what’s right or wrong, or about what people are concerned about

Inflation is defined as a continuous rise in the price level, whatever that might mean, and not a shift in relative value or an increase in a specific basket of goods and services.

so if the peaches die, and there are fewer peaches, and the price goes up reflecting the lower quantity being allocated to the highest bidders, that’s a relative value shift and not inflation.

if, however, the gov somehow increases everyone’s purchasing power so they have the funds to afford the same quantity of peaches, all that happens is the price goes up further. And if that policy is continuous, the result is a relative value story turns into an inflation story.

The measure of actual inflationary pressure is the unemployment rate. This takes inflation to means demand side inflation, i.e., effective demand outrunning the capacity of the economy to expand in order to accomodate it.

MMT specifically says that rising price level from the supply side is another matter and cannot be addressed monetarily or fiscally as demand side inflation. Either supply must be increased through innovation, substitution, etc., or demand has to be distributed differently, e.g., rationing vital resources. This was done quite successfully in the US during WWII, for instance, when interest rates remained low, the deficit ballooned, while domestic supply was commandeered for military use.

I can’t find data for public sector compensation similar to the CPI data. Where is that?

So, you’re saying that the price the government pays for labor sets the price for labor throughout the economy, and that this is what drives the inflation? I have no data at hand, but in my memory of recent events it seems that federal employees, along with SS recipients, haven’t had a raise in a couple of years, because CPI was low. Now CPI and GDP deflator are rising again, prior to any raises. The timing doesn’t match up with your assertion of a causal relationship. It does match up with the reverse causal relationship, wages being adjusted because of past inflation.

Secondly, how does this match up with the MMT assertion that increased government spending in the absence of full employment is not inflationary? Is a raise for government employees different than buying more jeeps for the Army, or filling more potholes, or a tax rebate, or an increase in transfer payments? Does certain spending only soak up slack in productive capacity, while other types of spending only tend to raise the general price level, regardless of utilization? I don’t see distinctions like that in my MMT readings so far.

Inflation can arise from the demand side or supply side. Demand side is owing to effective demand outrunning the capacity of the economy to provide for it. Supply side from supply shortage, e.g., competition in the international marketplace for real resources, supply bottlenecks, etc. Most recent inflation in the US has been supply side.

a relative value change turns into ‘inflation’ when it’s passed through to wages and other compensation which then drives prices up that much more, etc.

it’s about gov paying more for the same thing vs real resource utilization.

but point taken about gov paying more for the same thing when at less than full employment, which should not itself alter private sector wages.
but over time the steadily rising public sector comp. can from time to time bump into something approaching sufficient private sector employment to move compensation higher.

however the last few decades have seen demand low enough to keep private sector wages down even as public sector wages have increased.

Our experience since going to fiat currency in 1971 is continuous inflation. Whether monetary and/or fiscal policy was tight or loose, prices go monotonically upward. Even during recessions, except perhaps for a month or two, prices go up. Even during the inter-recessionary periods we have not achieved full employment by MMT standards, and prices go up.

Minimum wage laws set a floor on one price, much like ELR would do. Yet even when the minimum wage does not change for years at a time, we have persistent inflation.

There are times you could try to blame it on oil, but as oil went down from $40 to $10 after 1980, and from $147 to $40 in 2008-9, prices in general still went up.

It could well be that we are not measuring it right. Most people think the official statistics underestimate the real rate of inflation. If the number is wrong, then, it is more likely that inflation is even higher than we think, rather than lower.

While one is working, it is true that inflation at low levels is not so much of a problem, as long as one’s wages keep up with prices. After retirement, though, most income sources are a fixed dollar amount, not adjusted for inflation, and can turn a comfortable retirement into poverty in less than 20 years, even if inflation is only 3%.

I gather that since we have only rarely approached, and never achieved, full employment since going to fiat currency in 1971, MMT would have favored even larger deficits than we actually had. So, what is there in the policies favored by MMT that is going to make price stability, rather than continuous inflation, possible in the face of faster money growth and persistent full employment?